Many people want to start investing but don’t know how to pick stocks, so they prefer mutual funds. The question is, which type of mutual funds will give the best returns and benefits to new investors? In this blog, I’ll explain how to start investing in mutual funds, why ELSS (Equity Linked Savings Scheme) mutual funds are best for beginners, and how to maximize returns from these funds.

Without further ado, let’s get started.

What are ELSS Mutual Funds?

• ELSS (Equity Linked Savings Scheme) is a type of mutual fund that predominantly invests at least 80% of its assets in equity and the rest in debt instruments.
• Investors can enjoy equity returns with tax saving benefits.
• This investment option is beneficial for investors who have just started their careers and need to kick-start their investment while saving on taxes. 

Why invest in ELSS Mutual Funds? – Advantages

• ELSS mutual funds offer a combination of tax savings and equity returns.
• Investors can claim a maximum tax deduction of 1.5 lakhs under Section 80C.
• Has the lowest lock-in period compared to other investments under Section 80C.
• ELSS is market-linked and generates higher returns when invested for longer periods compared to other investment types.
• Investors can invest through a Systematic Investment Plan (SIP) or a lump sum, according to their convenience.
• Easy to invest, with many fund houses supporting investments with a minimum of 500 rupees.   

Let’s compare ELSS with other tax-saving schemes under Section 80C:

Investments	ELSS	Public Provident Fund (PPF)	National Savings Certificate (NSC)	5 Year Tax-Saving Fixed Deposits	National Pension System (NPS)
Investment Type	Mutual Fund (Equity)	Government Scheme	Government Scheme	Bank Fixed Deposit	Pension Scheme
Risk Factor	High	Low	Low	Low	Moderate to High
Lock-in Period	3 years	15 years	5 years	5 years	60 years age
Expected Returns	Market-linked	~7% (Varies)	~7.7% (Varies)	~ 5.5% to 7.5%	Market-linked

How can I invest in ELSS Mutual Funds?

Investors can easily invest in mutual funds through dedicated applications supported by many brokerage firms. They can choose reputable brokerage companies, select suitable mutual funds, and begin investing either through SIP or lump sum. It’s important to opt for trustworthy brokerage firms that prioritize investors’ goals. Unfortunately, there have been cases where brokerage firms misled investors, leading to significant financial losses and wasted time.

I’ll be writing a dedicated blog on reviewing top 10 mutual fund brokers very soon.

Points to consider before investing in ELSS:

• For beginners, it’s advisable to select a maximum of 1 or 2 ELSS mutual funds. This allows room for diversification by adding other categories of mutual funds to the portfolio, enhancing the potential for good returns.
• Don’t exceed more than 1.5 lakhs of combined 80C returns. While there’s no harm in doing so, I recommend keeping ELSS investments within the 80C limit and diversifying into different categories when there are multiple options available.
• If you withdraw funds from ELSS before the three-year lock-in period, you’ll lose the tax benefits claimed on the investment. The withdrawn amount will be considered taxable income in the year of withdrawal, and taxes will be applicable on the profits according to your income tax slab.
• ELSS investments held for more than three years are considered Long-Term Capital Assets. Any gains from redemption are subject to Long-Term Capital Gains Tax (LTCG) at a rate of 10% on gains exceeding Rs 1 lakh. However, these gains are eligible for indexation benefits, which can help reduce your tax liability.

Which ELSS mutual fund should I select?

The past performance of any mutual fund does not guarantee its future returns. Deciding to invest in mutual funds solely based on past performance is not advisable. It’s essential to discuss this with your financial advisor before making any decisions.

In India, CRISIL is a rating agency that evaluates mutual funds based on various parameters, including performance over different time periods (12, 24, 36, 60, and 120 months), liquidity, industry concentration, and company concentration. It ranks mutual funds on a scale of 1 to 5, with the top 10 percentile ranking 1 and the top 20 percentile ranking 2.

Find CRISIL’s ranking of ELSS mutual funds – https://www.crisil.com/en/home/what-we-do/financial-products/mf-ranking.html

You can also find detailed information on mutual funds on the MoneyControl website. – https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/elss.html

What should one expect from ELSS Mutual Funds?

• ELSS Mutual Funds provide tax benefits under section 80C, which upfront saves you 10–30% tax on ₹1,50,000, resulting in ₹15,000–45,000 savings depending on your tax slab.
• If you invest for the long term, you can expect around 14-15% annual returns

Example: –

• • Monthly SIP – 12,500/-
    • Expected return rate (per annum) – 15%
    • Time period – 20 years
      • Total invested amount – 30,00,000/-
      • Estimated returns – 1,59,49,437/-
      • Total Value – 1,89,49,437/-
    • • A simple investment of ₹12,500 per month can turn into a mammoth total of ₹1.89 crores, a six-fold increase! If you stay invested for the long term, you stand to receive greater rewards.

• • But let me make one thing clear: the market never moves in a straight line. There will be short-term volatility, and investors should assess the risk before making any investment decisions.

For more personal financial topics – https://path2financialfreedom.com/blog/ .